Industry experts believe blockchain is a technology that has the potential to affect the business of most IT professionals in the next five years. Pick an industry you feel will be most affected by bl

21 22 N o doubt you’ve heard or read about blockchain technol- o g y. 1 There’s certainly been a lot of hype. But you’re prob- ably more than a little fuzzy on what blockchain is and what, if anything, it can do for your organization now. You have a lot of questions, which we will try to answer. While it’s still too early for you to worry about adopting blockchain in your benefits-centric organization, it’s not too soon to start learning what it is, to educate yourself and to be prepared.

Remember where cloud computing stood six or seven years ago? Everyone was talking about it, but relatively few organizations used it, let alone under - stood it. That’s where blockchain is to- day. Like the cloud, blockchain is more than just a buzzword. It may have great potential to transform your organiza- tion. Just not yet. What Is Blockchain? Simply put, blockchain is a new form of ledger. Remember that led- gers are a collection of accounts, a list of events and transactions. They used to be books. Today they’re databases.

In the future, in many cases, they’ll be blockchain. A defining characteristic of block- chain is that instead of storing and pro- cessing data in a centralized database (with a backup, of course), as we do to- day, it uses distributed ledger technology. This means that data is shared member to member (more properly described as peer to peer), across all the members of a network (also known as nodes ). See Figure 1. Any approved user can add or change data in the blockchain and instantly view transactions made by other users. The data is replicated and synchronized, all greatly minimizing any chance of discrepancy or manipu- lation. Every piece of information a user adds is mathematically encrypted.

Moreover, every time a user changes a unit of data (a block ) it automatically re-encrypts all of the previous trans- actions (the chain ). As a result, the blockchain data gets more secure every time a user makes a change to the led- ger. This significantly reduces the risk of privacy breaches and unauthorized data manipulation. blockchain FIGURE 1 This is how data is processed and stored today . This is how data is processed and stored using blockchain. Backup Database Node Node Node Node Node Node Node benefits magazine may 2019 Data cannot be manipulated without network consensus 2 from most contributors to the blockchain. This ensures the blockchain is transparent, consistent and almost completely immutable 3 without going through a centralized authority, like a bank. See Figure 2. What Are the Advantages of Blockchain? In addition to giving users access to up-to-date informa- tion, blockchain creates trust by providing a verifiable, de- centralized record of transactions. The four key benefits are: 1. Transparency. Any user can examine the entire trans- action history of the blockchain.

2. I n t e g r i t y. Users are required to rely on the network’s shared protocol.

3. Efficiency. Eliminating third parties minimizes settle- ment times and reduces payment and processing fees.

4. Security. Verified transactions can’t be modified.

Blockchain is particularly valuable in low-trust envi- ronments where participants can’t transact business di- rectly or lack a trusted intermediary. For example, the United Nations Development Program (UNDP) used it in Serbia alongside several nongovernmental organizations.

People were allowed to receive remittances from their families through a UNDP portal. The funds were sent di- rectly to individuals’ digital identity cards, which could be used to buy groceries and electricity and pay bills. Block- chain was used to keep record of how the funds were al- located, and it enabled everyone to trade where money was spent. Can Anyone Join a Blockchain? That all depends on whether the blockchain is public or private. A public blockchain (like the cryptocurrency Bitcoin) is open to all participants, and network expansion is encour - aged. Anyone can run a node on the network. The complete transaction history is visible to all. Consensus is achieved through decentralized methods, such as proof of work, which requires some type of work from the participants or proof of stake, in which the creator of a new block is chosen in a predetermined method, based on the existing wealth of the participant. On the other hand, a private blockchain is open only to allowed participants. These are typically business partners learn more Education 65th Annual Employee Benefits Conference October 20-23, San Diego, California Visit www.ifebp.org/usannual for more information. blockchain FIGURE 2 A Digital Ledger It maintains a record of all the transactions on a peer -to-peer network. Immutable All the data on a blockchain is encrypted, and every change is recorded so it can’ t be changed. Decentralized There’ s no need for a principal authority .V ersatile Much more than the platform for cryptocurrencies, blockchain can be used to share contracts, records and other data. Safe Information is encrypted so it can be shared among numerous members in complete privacy .

23 24 whose integrity is assumed. In a private blockchain, nodes can have different levels of privileges and permissions. Consensus can be achieved through a wider variety of methods (not nec- essarily decentralized or computer-intensive methods).

Who Uses Blockchain? Today, blockchain is being used most widely and aggres- sively by many cryptocurrencies. However, it is being studied for use in: • Supply-chain management—to validate the sources and quality of goods as they move from suppliers to end users • Financial services—to reduce the cost of real-time transfers between bank accounts while mitigating transactional risks • Property rights—to register ownership by verifying identity and preventing fraud and error • Retail —to protect consumers who will not need to provide personal information to make purchases.

Common examples of potential applications include:

• Smart contracts. 4 Blockchain could expedite bicycle- sharing systems 5 and automatically unlock the door to rented lodgings.

• Cloud storage. Users could earn tokens (cryptocur - rency) for storing other people’s data on their unused hard drive space.

• Payroll. Cryptocurrencies make it easy to pay interna- tional workers. • Voting. Blockchain elections would be virtually un- hackable.

• Business process management. Processes such as claims adjustments could stretch across multiple orga- nizations more fluidly and easily than today.

That said, aside from the cryptocurrencies, no major block- chain initiatives have advanced beyond the research or beta (limited testing) phase. There is no widespread market adop- tion. Although there have been a slew of business press articles purporting to describe how companies “use” blockchain, they all describe planned initiatives, prototypes or limited imple- mentations, not robust functioning environments. Some of the possibilities for the use of blockchain in health care, highlighted in a 2018 CB Insights 6 report, include: • Managed-provider information management • Drug supply-chain application • Claims-management payments and prior authorization • Patient health records and other patient-specific applications.

While some of these initiatives may be available in the near term, most are targeted as future endeavors. Then Why All the Hype? Blame it on the cryptocurrencies, which use blockchain, especially bitcoin. In fact, blockchain and bitcoin are often confused (See the sidebar “What’s the Difference Between Blockchain and Bitcoin?”). As of this writing, there were approximately 2,520 crypto- currencies with market capitalization of $114.4 billion, 7 but the number and value of these cryptocurrences can fluctuate drastically. The mostly positive coverage cryptocurrencies have received has facilitated their rapid growth. This has led to vast investments for blockchain startups, rising consumer awareness and government support. According to Bain & Company research, 80% of financial executives think this new technology will be transformative. 8 Moreover, 41% of respondents to a Deloitte global survey say they expect their organizations will bring blockchain into production within the next year, although 39% think the technology is overhyped. 9 Are There Any Drawbacks to Using Blockchain? That depends on how you use it. When it comes to da- tabases, blockchain’s advantages come with significant takeaways • Blockchain is a new form of ledger that shares mathematically encrypted data across all members of a network. Data in the ledger cannot be manipulated without network consensus from most contributors to the blockchain.

• Key advantages of blockchain are transparency, integrity, efficiency and security.

• Blockchain is used most widely by cryptocurrencies but is being studied for business uses including supply-chain management, financial services, property rights and retail.

• Traditional databases may perform better than blockchain in some instances because they have faster processing times.

• Because the market for blockchain is not mature outside of cryptocurrency, the technology will not make its way into benefits for some time.

blockchain benefits magazine may 2019 trade-offs. In some instances, traditional databases may perform better than blockchain. This is because traditional databases are usually centralized, which makes processing time exponentially faster. This is an extremely important consideration, especially if a transaction has to be com- pleted quickly. For example, blockchain is not well-suited for booking reservations or purchasing goods and servic- es that are needed right away since the amount of time it would take for consensus to be realized may be unaccept- able. In addition, like any database model, blockchain is not 100% immutable. System security depends on the adjacent applications, which can be attacked and breached.

So What’s the Bottom Line About Blockchain? While blockchain has real promise, much of its value has yet to be realized. Pure potential is great for discussion but poor for production. To unlock the value of blockchain, you will need to un- derstand how and if it aligns with your organization. For example, blockchain works to solve trust problems by pro- viding a verifiable, decentralized record of transactions and allowing network members to post transactions directly to other peers without having to go through an intermediary.

If you don’t require that kind of functionality, you may not need blockchain. When organizations determine they can benefit from blockchain, it is important to beware of blockchain vapor - ware (products that are marketed and either not delivered or fail to even minimally meet expectations). As always, buy only from vendors that present real solutions to real problems rather than offering the latest “blockchain secret sauce.” For now, however, it is enough to know the technology.

Don’t feel pressured to adopt it yet. The market is not mature outside of cryptocurrency, and it will take a while for viable blockchain solutions to make their way into employee ben- efits design and administration. Endnotes 1. Blockchain technology will be referred to as blockchain throughout the article.

2. Consensus is a mechanism in which participants on the blockchain reach agreement on the validity of the ledger. It is a critical feature of a blockchain.

3. Immutable means not capable or susceptible to change.

4. Smart contracts are self-executed protocols that are activated when predetermined conditions are met. They add significant value to blockchain by allowing transactions to take place automatically without human inter - ference.

5. A bicycle-sharing system is a service in which bicycles are made avail- able for shared use to individuals on a short-term basis. They are in use in many major metropolitan areas.

6. “How Blockchain Technology Could Disrupt Healthcare,” CB insights, Research Report, accessed March 4, 2019. Available at www.cbinsights.com /research/report/blockchain-technology-healthcare-disruption/.

7. Investing.com, accessed February 1, 2019, www.investing.com /crypto/currencies.

8. Thomas Olsen, Frank Ford, John Ott and Jennifer Zeng, “Blockchain in Financial Markets: How to Gain an Edge,” Bain & Company Brief, Febru - ary 9, 2017.

9. Linda Pawczuk, Rob Massey, David Schatsky, Breaking blockchain open—Deloitte’s 2018 global blockchain survey, January 2018. Michael Stoyanovich is a vice president and senior consultant with the administrative and technology consulting practice at Segal Consult- ing. He has more than 20 years of experience in the technology and benefits indus- try, including extensive expertise in technology and working with multiemployer plans. He can be reached at [email protected].

Frank E. Tanz is a vice president and senior consultant with Segal Consulting. He has more than 20 years of experience in the Taft- Hartley multiemployer industry and is an expert in multiple disciplines, including software engineering, database administration, networking and system administration. He can be reached at [email protected]. bios What’s the Difference Between Blockchain and Bitcoin?

Blockchain is best known as the driving force behind the dominant cryptocurrency Bitcoin. But it’s not the same thing.

The confusion began in 2008 when a single white paper introduced both Bitcoin and blockchain. The first Bitcoin transaction took place \ the next year.

The proliferation of Bitcoin and the resulting media attention led to the incorrect assumption that Bitcoin and blockchain are synony- mous. Although blockchain powers Bitcoin, cryptocurrency is but one application of the technology. It has many other applications. blockchain 25 Copyright ofBenefits Magazine isthe property ofInternational FoundationofEmployee Benefits anditscontent maynotbecopied oremailed tomultiple sitesorposted toalistserv without thecopyright holder'sexpresswrittenpermission. However,usersmayprint, download, oremail articles forindividual use.